Item
1.
Financial Statements
.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except par value amount)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,571
|
|
|
$
|
3,223
|
|
Accounts receivable, net of allowances of $136 and $266, respectively
|
|
|
641
|
|
|
|
919
|
|
Site equipment to be installed
|
|
|
2,985
|
|
|
|
3,990
|
|
Prepaid expenses and other current assets
|
|
|
1,027
|
|
|
|
978
|
|
Total current assets
|
|
|
8,224
|
|
|
|
9,110
|
|
Fixed assets, net
|
|
|
3,511
|
|
|
|
3,915
|
|
Software development costs, net of accumulated amortization of $2,469 and
$2,381, respectively
|
|
|
904
|
|
|
|
943
|
|
Deferred costs
|
|
|
1,188
|
|
|
|
1,328
|
|
Goodwill
|
|
|
973
|
|
|
|
909
|
|
Intangible assets, net
|
|
|
54
|
|
|
|
79
|
|
Other assets
|
|
|
102
|
|
|
|
124
|
|
Total assets
|
|
$
|
14,956
|
|
|
$
|
16,408
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
379
|
|
|
$
|
211
|
|
Accrued compensation
|
|
|
821
|
|
|
|
1,024
|
|
Accrued expenses
|
|
|
529
|
|
|
|
670
|
|
Sales taxes payable
|
|
|
114
|
|
|
|
192
|
|
Income taxes payable
|
|
|
13
|
|
|
|
22
|
|
Current portion of long-term debt (Note 5)
|
|
|
3,014
|
|
|
|
1,072
|
|
Current portion of obligations under capital leases
|
|
|
75
|
|
|
|
78
|
|
Deferred revenue
|
|
|
1,353
|
|
|
|
1,214
|
|
Other current liabilities
|
|
|
284
|
|
|
|
639
|
|
Total current liabilities
|
|
|
6,582
|
|
|
|
5,122
|
|
Long-term debt
|
|
|
5,227
|
|
|
|
6,366
|
|
Long-term obligations under capital leases
|
|
|
120
|
|
|
|
138
|
|
Deferred revenue, excluding current portion
|
|
|
279
|
|
|
|
393
|
|
Deferred rent
|
|
|
460
|
|
|
|
541
|
|
Other liabilities
|
|
|
4
|
|
|
|
-
|
|
Total liabilities
|
|
|
12,672
|
|
|
|
12,560
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Series A 10% cumulative convertible preferred stock, $.005 par value, $156
liquidation preference, 5,000 shares authorized; 156 shares issued and outstanding at June 30, 2016 and December 31, 2015
|
|
|
1
|
|
|
|
1
|
|
Common stock, $.005 par value, 168,000 shares authorized at June 30, 2016 and December 31,
2015; 1,849 shares issued and outstanding at June 30, 2016 and December 31, 2015 (Note 2)
|
|
|
9
|
|
|
|
9
|
|
Treasury stock, at cost, 10 shares at June 30, 2016 and December 31, 2015
|
|
|
(456
|
)
|
|
|
(456
|
)
|
Additional paid-in capital
|
|
|
129,429
|
|
|
|
129,209
|
|
Accumulated deficit
|
|
|
(126,986
|
)
|
|
|
(125,087
|
)
|
Accumulated other comprehensive income (Note 6)
|
|
|
287
|
|
|
|
172
|
|
Total shareholders’ equity
|
|
|
2,284
|
|
|
|
3,848
|
|
Total liabilities and shareholders’ equity
|
|
$
|
14,956
|
|
|
$
|
16,408
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In
thousands, except per share amounts)
(unaudited)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
4,355
|
|
|
$
|
4,202
|
|
|
$
|
8,729
|
|
|
$
|
8,402
|
|
Sales-type lease revenue
|
|
|
301
|
|
|
|
1,251
|
|
|
|
697
|
|
|
|
2,091
|
|
Other revenue
|
|
|
751
|
|
|
|
740
|
|
|
|
1,463
|
|
|
|
1,426
|
|
Total Revenue
|
|
|
5,407
|
|
|
|
6,193
|
|
|
|
10,889
|
|
|
|
11,919
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs (includes depreciation and amortization of $620 and
$597 for the three months ended June 30, 2016 and 2015, respectively, and $1,263 and $1,177 for the six months ended June
30, 2016 and 2015, respectively)
|
|
|
1,840
|
|
|
|
3,379
|
|
|
|
3,876
|
|
|
|
6,028
|
|
Selling, general and administrative
|
|
|
4,153
|
|
|
|
4,868
|
|
|
|
8,353
|
|
|
|
10,030
|
|
Impairment of capitalized software
|
|
|
-
|
|
|
|
295
|
|
|
|
-
|
|
|
|
295
|
|
Depreciation and amortization (excluding depreciation
and amortization included in direct operating costs)
|
|
|
110
|
|
|
|
123
|
|
|
|
224
|
|
|
|
244
|
|
Total operating expenses
|
|
|
6,103
|
|
|
|
8,665
|
|
|
|
12,453
|
|
|
|
16,597
|
|
Operating loss
|
|
|
(696
|
)
|
|
|
(2,472
|
)
|
|
|
(1,564
|
)
|
|
|
(4,678
|
)
|
Other expense, net
|
|
|
(149
|
)
|
|
|
(139
|
)
|
|
|
(303
|
)
|
|
|
(182
|
)
|
Loss before income taxes
|
|
|
(845
|
)
|
|
|
(2,611
|
)
|
|
|
(1,867
|
)
|
|
|
(4,860
|
)
|
Provision for income taxes
|
|
|
(5
|
)
|
|
|
(14
|
)
|
|
|
(24
|
)
|
|
|
(28
|
)
|
Net loss
|
|
$
|
(850
|
)
|
|
$
|
(2,625
|
)
|
|
$
|
(1,891
|
)
|
|
$
|
(4,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.46
|
)
|
|
$
|
(1.43
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(2.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted (Note 2)
|
|
|
1,839
|
|
|
|
1,838
|
|
|
|
1,839
|
|
|
|
1,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(850
|
)
|
|
$
|
(2,625
|
)
|
|
$
|
(1,891
|
)
|
|
$
|
(4,888
|
)
|
Foreign currency translation adjustment
|
|
|
2
|
|
|
|
42
|
|
|
|
115
|
|
|
|
(111
|
)
|
Total comprehensive loss
|
|
$
|
(848
|
)
|
|
$
|
(2,583
|
)
|
|
$
|
(1,776
|
)
|
|
$
|
(4,999
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Six months ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,891
|
)
|
|
$
|
(4,888
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,487
|
|
|
|
1,421
|
|
Provision for doubtful accounts
|
|
|
24
|
|
|
|
12
|
|
Excess and obsolete site equipment to be installed expense
|
|
|
27
|
|
|
|
607
|
|
Stock-based compensation
|
|
|
223
|
|
|
|
218
|
|
Amortization of debit issuance costs
|
|
|
18
|
|
|
|
4
|
|
Issuance of common stock to consultant in lieu of cash payment
|
|
|
-
|
|
|
|
1
|
|
Impairment of capitalized software
|
|
|
-
|
|
|
|
295
|
|
Loss from disposition of equipment
|
|
|
6
|
|
|
|
5
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
254
|
|
|
|
1,626
|
|
Site equipment to be installed
|
|
|
265
|
|
|
|
388
|
|
Prepaid expenses and other assets
|
|
|
131
|
|
|
|
67
|
|
Accounts payable and accrued liabilities
|
|
|
(254
|
)
|
|
|
(251
|
)
|
Income taxes payable
|
|
|
(10
|
)
|
|
|
(27
|
)
|
Deferred costs
|
|
|
141
|
|
|
|
(207
|
)
|
Deferred revenue
|
|
|
27
|
|
|
|
-
|
|
Deferred rent
|
|
|
(81
|
)
|
|
|
(72
|
)
|
Other liabilities
|
|
|
(354
|
)
|
|
|
(334
|
)
|
Net cash provided by (used in) operating activities
|
|
|
13
|
|
|
|
(1,135
|
)
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(291
|
)
|
|
|
(445
|
)
|
Software development expenditures
|
|
|
(175
|
)
|
|
|
(379
|
)
|
Proceeds from the sale of equipment
|
|
|
-
|
|
|
|
9
|
|
Net cash used in investing activities
|
|
|
(466
|
)
|
|
|
(815
|
)
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
|
|
|
(42
|
)
|
|
|
(23
|
)
|
Proceeds from long-term debt
|
|
|
2,114
|
|
|
|
4,574
|
|
Payments on long-term debt
|
|
|
(1,311
|
)
|
|
|
(4,267
|
)
|
Debt issuance costs on long-term debt
|
|
|
(2
|
)
|
|
|
(81
|
)
|
Payments to cashed-out stockholders in connection with reverse/forward stock
split (Note 2)
|
|
|
(3
|
)
|
|
|
-
|
|
Payment of preferred stockholders dividends
|
|
|
(8
|
)
|
|
|
-
|
|
Proceeds from exercise of stock options
|
|
|
-
|
|
|
|
1
|
|
Net cash provided by financing activities
|
|
|
748
|
|
|
|
204
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
295
|
|
|
|
(1,746
|
)
|
Effect of exchange rate on cash
|
|
|
53
|
|
|
|
(48
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
3,223
|
|
|
|
7,185
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,571
|
|
|
$
|
5,391
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
217
|
|
|
$
|
246
|
|
Income taxes
|
|
$
|
35
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Site equipment transferred to fixed assets
|
|
$
|
537
|
|
|
$
|
610
|
|
Site equipment transferred to other current assets
|
|
$
|
176
|
|
|
$
|
-
|
|
Equipment acquired under capital lease
|
|
$
|
22
|
|
|
$
|
160
|
|
Issuance of common stock in lieu of payment of preferred
dividends
|
|
$
|
-
|
|
|
$
|
8
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS
OF PRESENTATION
Description
of Business
NTN
Buzztime, Inc. (the “Company”) delivers interactive entertainment and innovative dining technology to bars and restaurants
in North America. Customers license the Company’s customizable solution to differentiate themselves via competitive fun
by offering guests trivia, card, sports and arcade games, nationwide competitions, and self-service dining features including
dynamic menus, touchscreen ordering and secure payment. The Company’s platform can improve operating efficiencies, create
connections among the players and venues and amplify guests’ positive experiences. Built on an extended network platform,
the Company’s interactive entertainment system has historically allowed multiple players to interact at the venue, and now
also enables competition between venues, referred to as massively multiplayer gaming. The Company’s current platform, which
it refers to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program in December 2012, was expanded
commercially during 2013, and the expansion was scaled during 2014. The Company continues to enhance its network architecture
and the BEOND tablet platform and player engagement paradigms. The Company also continues to support its legacy network product
line, which it refers to as Classic.
The Company currently
generates revenue by charging subscription fees for its service to its network subscribers, by leasing equipment (including tablets
used in its BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by hosting
live trivia events, and by selling advertising aired on in-venue screens and as part of customized games. In 2014, the Company
began offering pay-to-play premium content to certain customers, such as paid arcade. During the second quarter of 2015, the Company
made a strategic change in its premium content model by making arcade available on both a free-to-consumer (in exchange for an
increased subscription fee) and pay-to-play basis. This change required the Company to delay the general availability of pay-to-play
arcade as it retooled its content, workflow and positioning. As a result, during 2015, the Company generated additional subscription
fee revenue from those venues offering free-to-consumer arcade. The Company began rolling out the new pay-to-play arcade during
the second quarter of 2016. As of June 30, 2016, 2,859 venues in the U.S. and Canada subscribed to the Company’s interactive
entertainment network, of which approximately 67% were using the BEOND tablet platform.
The
Company was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications, Inc. in
1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.
Basis
of Accounting Presentation
The
accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) for interim financial statements and with the instructions to Form 10-Q and Article 8 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments
that are necessary, which are of a normal and recurring nature, for a fair presentation for the periods presented of the financial
position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: IWN, Inc., IWN, L.P., Buzztime
Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN Buzztime, Ltd.,
all of which, other than NTN Canada, Inc., are dormant subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015. The accompanying
condensed balance sheet as of December 31, 2015 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for
the three and six months ended June 30, 2016 are not necessarily indicative of the results to be anticipated for the entire year
ending December 31, 2016, or any other period.
Reclassifications
The
Company reclassified the condensed consolidated statement of cash flows for the six months ended June 30, 2015 to conform to the
2016 presentation. Reclassifications had no impact on net loss or cash flows.
(2) REVERSE/FORWARD
SPLIT OF COMMON STOCK
At
the Company’s annual meeting of stockholders held on June 3, 2016, the Company’s stockholders approved an amendment
to its restated certificate of incorporation to give effect to, first, a reverse split of the Company’s outstanding common
stock at an exchange ratio of 1-for-100 and, then, immediately following such reverse split, a forward split of its outstanding
common stock at a ratio that is not less than 2-for-1 nor greater than 4-for-1, with the final ratio to be selected by the Company’s
board of directors in its sole discretion. The board of directors set the final ratio of the forward split at 2-for-1. The Company
refers to the reverse split and to the forward split, together, as the “reverse/forward split.”
On
June 16, 2016 (the “Effective Date”), the Company filed with the Secretary of State of Delaware the amendment to its
restated certificate of incorporation to effect the reverse/forward split. The 1-100 reverse split was effective at 6:00 p.m.
Eastern Time on the Effective Date and the 2-for-1 forward split was effective at 6:01 p.m. Eastern Time on the Effective Date.
Any fractional share of common stock resulting from the forward split was rounded up to the nearest whole share. Any stockholder
who, as of immediately prior to 6:00 p.m. Eastern Time on the Effective Date, held fewer than 100 shares of the Company’s
common stock in one account and, subsequent to the reverse split, would otherwise have been entitled to less than one full share
of common stock, received, instead of the fractional share, $0.12 in cash for each such share held in that account, which was
equal to the average of the closing price per share of the Company’s common stock on the NYSE MKT over the five trading
days immediately before and including the Effective Date. As of immediately prior to the reverse split/forward split on the Effective
Date, the Company had 92,439,174 of common stock outstanding, and subsequent to the reverse/forward split, it had 1,848,597 shares
of common stock outstanding. Approximately $3,000 was paid to cashed-out stockholders who owned less than 100 shares immediately
prior to the reverse split on the Effective Date.
The
number of shares of the Company’s authorized common stock did not change in connection with the reverse/forward split. However,
upon the effectiveness of the reverse/forward split, the number of authorized shares of the Company’s common stock that
are not issued or outstanding increased due to the reduction in the number of shares of its common stock issued and outstanding
as a result of the reverse/forward split.
The
reverse/forward split did not affect the par value of a share of the Company’s common stock, which remains at $0.005 per
share. As a result, the stated capital attributable to common stock on the Company’s consolidated balance sheet has been
reduced proportionately based on the reverse/forward split exchange ratio, and the additional paid-in capital account was credited
with the amount by which the stated capital was reduced. Comparative financial statements have been retroactively adjusted. There
are no other accounting consequences arising from the reverse/forward split.
As
provided for in the Company’s equity incentive plans and outstanding warrant agreements, the number of shares subject to
the equity plans and warrant agreements along with any exercise prices of outstanding awards, were equitably and proportionately
adjusted. Additionally, the conversion rate for the Company’s Series A convertible preferred stock was also equitably and
proportionately adjusted so that holders of the Series A convertible preferred stock would be entitled to receive, upon conversion,
the number of shares of the Company’s common stock that such holders would have been entitled to receive immediately following
the reverse/forward split, had such shares of the Series A convertible preferred stock been converted into shares of the Company’s
common stock immediately prior to the reserve/forward split.
(3) Basic
and Diluted Earnings Per Common Share
The
Company computes basic and diluted earnings per common share in accordance with the provisions of Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) No. 260,
Earnings per Share
. Basic earnings
per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted earnings per share reflects
the potential dilution of securities that could share in the Company’s earnings. The total number of shares of the Company’s
common stock subject to options, warrants, and convertible preferred stock that were excluded from computing diluted net loss
per common share was approximately 457,000 and 451,000 shares (after taking into account the proportion adjustments as a result
of the reverse/forward split described in Note 2) as of June 30, 2016 and 2015, respectively, as their effect was anti-dilutive.
(4) STOCK-BASED
COMPENSATION
All
amounts reported below have been proportionately adjusted as a result of the reverse/forward split discussed in Note 2, when applicable.
The
Company’s stock-based compensation plans include the NTN Buzztime, Inc. 2004 Performance Incentive Plan (the “2004
Plan”), the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “Amended 2010 Plan”) and the NTN
Buzztime, Inc. 2014 Inducement Plan (the “2014 Plan”). The 2004 Plan expired in September 2009. From and after the
date it expired, no awards could be granted under that plan and all awards that had been granted under that plan before it expired
are governed by that plan until they are exercised or expire in accordance with that plan’s terms. The Amended 2010 Plan
provides for the grant of up to 240,000 share-based awards and expires in February 2020. As of June 30, 2016, approximately 126,000
share-based awards were available to be issued under the Amended 2010 Plan. The 2014 Plan, which provides for the grant of up
to 85,000 share-based awards to a new employee as an inducement material to the new employee entering into employment with the
Company, was approved by the Nominating and Corporate Governance/Compensation Committee of the Company’s Board of Directors
(the “Committee”) in September 2014 in connection with the appointment of Ram Krishnan as the Company’s Chief
Executive Officer. As of June 30, 2016, there were no share-based awards available to be granted under the 2014 Plan. The Company’s
stock-based compensation plans are administered by the Committee, which selects persons to receive awards and determines the number
of shares subject to each award and the terms, conditions, performance measures, if any, and other provisions of the award.
The
Company records stock-based compensation in accordance with ASC No. 718
, Compensation – Stock Compensation
and ASC
No. 505-50,
Equity – Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
following weighted-average assumptions were used for grants issued during the three and six months ended June 30, 2016 and 2015
under the ASC No. 718 requirements.
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average risk-free rate
|
|
|
1.16
|
%
|
|
|
1.19
|
%
|
|
|
1.20
|
%
|
|
|
1.18
|
%
|
Weighted average volatility
|
|
|
111.27
|
%
|
|
|
83.01
|
%
|
|
|
111.02
|
%
|
|
|
82.40
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected life
|
|
|
6.29
years
|
|
|
|
4.20
years
|
|
|
|
6.17
years
|
|
|
|
4.29
years
|
|
ASC
No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture
rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation
expense for the three months ended June 30, 2016 and 2015 was $110,000 and $119,000, respectively, and $223,000 and $218,000 for
the six months ended June 30, 2016 and 2015, respectively, and is expensed in selling, general and administrative expenses and
credited to additional paid-in-capital. The Company granted stock options to purchase approximately 20,000 and 26,000 shares of
common stock during the three months ended June 30, 2016 and 2015, respectively, and stock options to purchase approximately 35,000
and 42,000 shares of common stock during the six months ended June 30, 2016 and 2015, respectively.
Stock
options issued under all of the Company’s stock-based compensation plans may be exercised on a net-exercise arrangement,
where shares of common stock equal to the value of the amount of the exercise price of the stock options being exercised are withheld
as payment of the exercise price instead of cash. Under such net-exercise arrangements, for the three and six months ended June
30, 2015, options to purchase approximately 960 and 1,600 shares of common stock were exercised, respectively, and approximately
190 and 360 shares of common stock were issued, respectively. In each of the three and six months ended June 30, 2015, the Company
received approximately $1,000 in cash payments for the exercise of options to purchase approximately 44 shares. The total intrinsic
value of all options exercised during the three and six months ended June 30, 2015 was approximately $3,000 and $7,000, respectively.
During the three and six months ended June 30, 2016, no options were exercised.
(5) DEBT
Revolving
Line of Credit
In
April 2015, the Company entered into a loan and security agreement (the “Original Loan Agreement”) with East West
Bank (the “Lender”), pursuant to which, the Company may request advances in an aggregate outstanding amount at any
time up to the lesser of $7,500,000, which is referred to as the revolving line, or an amount equal to its borrowing base, in
each case, less the aggregate outstanding principal amount of prior advances. So long as there is no event of default, the Company
may make a one-time request to increase the revolving line by up to $2,500,000, which the Lender may accept or decline. In March
2016, the Company and the Lender entered into an amendment (the “Amendment”) to the Original Loan Agreement. The Original
Loan Agreement as amended by the Amendment is referred to as the “Amended Loan Agreement.” Under the Amended Loan
Agreement, through March 31, 2017, the Company may request advances in an aggregate outstanding amount at any time up to the lesser
of (a) the revolving line (or $7,500,000) or (b) the sum of $2,000,000 (which the Company refers to as the “sublimit”)
plus the amount equal to the Company’s borrowing base, in each case, less the aggregate outstanding principal amount of
prior advances. On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds
the lesser of the revolving line or the amount equal to the Company’s borrowing base, then it must pay the Lender the amount
of such excess.
Under
the Original Loan Agreement, the Company’s borrowing base was, as of the date of determination, an amount equal to the product
of: (a) the average monthly recurring revenue for the immediately preceding three months; times (b) one plus the average churn
rate for the immediately preceding three months (not to exceed zero); times (c) 300%. The churn rate, with respect to any month,
is the quotient of the Company’s monthly net revenue change calculated with respect to such month, divided by its monthly
revenue from subscriptions for the month. The manner in which the borrowing base is determined is unchanged under the Amendment,
except that the monthly recurring revenue is limited to all recurring subscription revenue attributable to software that the Company
sold or licensed and all recurring revenue relating to services it delivered and 50% of all revenue attributable to the Company’s
“Stump” product line.
In
addition, under the Amended Loan Agreement, the Company is required to meet a minimum adjusted earnings before interest, taxes,
depreciation and amortization (“Adjusted EBITDA”) target and churn rate targets, in each case, as specified in the
Amended Loan Agreement. Adjusted EBITDA is the sum (a) net profit (or loss), after provision for taxes, plus (b) interest expense,
plus (c) to the extent deducted in the calculation of net profit (or loss), depreciation expense and amortization expense, plus
(d) income tax expense, plus (e) non-cash stock compensation expenses, plus (f) other non-cash expenses and charges, plus (g)
to the extent approved by the Lender, other one-time charges, plus (h) to the extent approved by the Lender, any losses arising
from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business. Under the Original Loan
Agreement, the Adjusted EBITDA target was measured as of the last day of each fiscal quarter with respect to the immediately prior
six-month period. Under the Amended Loan Agreement, the Adjusted EBITDA target is measured as of the last day of each fiscal quarter
with respect to the immediately prior three-month period. The churn rate targets, which were unchanged in the Amendment, are measured
on a monthly and trailing three-month basis. The Company met the Adjusted EBITDA and the trailing three-month churn rate targets
as of the quarters ended March 31, 2016 and June 30, 2016. The Company also met the churn rate targets on a monthly basis during
the quarter ended June 30, 2016. During the quarter ended March 31, 2016, the Company did not meet the monthly churn rate target
for the month ended January 31, 2016, which constituted an event of default under the Original Loan Agreement, however, the Lender
waived that event of default.
The
Amended Loan Agreement requires: (a) that the Company maintain a balance on deposit with the Lender equal to (i) on March 31,
2017, 100% of the aggregate outstanding principal amount of the advances at such time, and (ii) at all times after March 31, 2017,
an amount determined by the Lender based on the Company’s 2017 financial projections; and (b) that the sum of the following
be not less than $2,000,000: (i) the aggregate amount of unrestricted cash that the Company holds in accounts maintained with
the Lender and (ii) the amount available to the Company under the Amended Loan Agreement.
Under
the Amended Loan Agreement, all then-outstanding advances are due on December 31, 2017 (under the Original Loan Agreement, the
due date was April 14, 2018). On or before March 31, 2017, advances will bear interest, at the Company’s option, at the
rate of either (A) a variable rate per annum equal to the prime rate as set forth in
The Wall Street Journal
plus 2.75%,
up from 1.25% under the original terms, or (B) at a fixed rate per annum equal to the LIBOR rate for the interest period for the
advance plus 5.50%, up from 4.00% under the original terms. After March 31, 2017, the interest rates will revert to their original
terms.
As
of June 30, 2016, the Company requested and received advances in the aggregate of $6,500,000, all of which were advanced at the
LIBOR rate plus the applicable margin with a three-month interest period. Each time the interest period expired on these advances,
the Company elected to renew the advance at the LIBOR rate plus the applicable margin with a three-month interest period. Prior
to the Amendment, the interest rate on advances ranged from 4.313% to 4.688% per annum. The interest rate on advances since the
Amendment have ranged from 6.125% to 6.188% per annum. As of June 30, 2016, $6,500,000 remained outstanding under this credit
facility, of which, $2,000,000 is recorded in current portion of long-term debt on the accompanying consolidated balance sheet.
The Company had approximately $110,000 available to borrow as of June 30, 2016 based on its borrowing base calculated as of that
date. The Company used approximately $3,381,000 of the total amount borrowed under this credit facility to pay down existing indebtedness
that was owed to an equipment lender (see “—Equipment Notes Payable,” below). Under the Amended Loan Agreement,
the amount that the Company may owe under its current credit facility with that equipment lender is not limited to any specified
amount. In addition, with the Lender’s consent, the Company may incur additional indebtedness with other equipment lenders
of up to $2,000,000 in the aggregate for equipment financing.
Pursuant
to the Amended Loan Agreement, the Company continues to grant and pledge to the Lender a first-priority security interest in all
the Company’s existing and future personal property.
The
Company has paid $37,500 to the Lender as a facility fee at the time of closing in April 2014 and approximately $2,000 for fees
associated with the Amendment. An additional facility fee (equal to the product of (x) 0.50% of the increase in the revolving
line times (y) the quotient of the number of days remaining between the effective date of such increase and December 31, 2017,
divided by 1,095) will be due if the revolving line is increased pursuant to the Company’s request. The Company also pays
an unused line fee equal to 0.50% per year of the difference between the amount of the revolving line as in effect from time to
time and the average monthly balance in each month, which is payable monthly in arrears. The average monthly balance is calculated
by adding the ending outstanding balance under the revolving line for each day in the month divided by the number of days in the
month.
Equipment
Notes Payable
In
May 2013, the Company entered into a financing arrangement with a lender under which the Company may borrow up to $500,000 to
purchase certain equipment. Over time, the lender has increased the maximum amount the Company may borrow, and as of June 30,
2016, the maximum amount was $9,853,000. The Company may borrow up to the maximum amount in tranches as needed. Each tranche borrowed
through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to 7.75% per
annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest payments are due in 36 equal monthly
installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate, the first monthly payment will
be equal to 24% of the principal amount outstanding, and the remaining principal and interest due is payable in 35 equal monthly
installments. The Company granted the lender a first security interest in the equipment purchased with the funds borrowed.
In
April 2015, the Company used approximately $3,381,000 of the proceeds received from the East West Bank credit facility to pay
down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest and a prepayment
fee. Through June 30, 2016, the Company borrowed approximately $9,302,000 of the $9,853,000 maximum amount available under this
financing arrangement. As of June 30, 2016, approximately $1,741,000 of principal remained outstanding under this financing arrangement,
of which, $1,014,000 is recorded in current portion of long-term debt on the accompanying consolidated balance sheet, and approximately
$551,000 was available for borrowing.
(6) ACCUMULATED
OTHER COMPREHENSIVE INCOME
The
United States dollar is the Company’s functional currency, except for its operations in Canada where the functional currency
is the Canadian dollar. The financial position and results of operations of the Company’s foreign subsidiaries are measured
using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830,
Foreign Currency
Matters
, revenues and expenses of the Company’s foreign subsidiaries have been translated into U.S. dollars at weighted
average exchange rates prevailing during the period, and the assets and liabilities of such subsidiaries have been translated
at the period end exchange rate. Accumulated other comprehensive income includes the accumulated gains or losses from these foreign
currency translation adjustments. As of June 30, 2016 and December 31, 2015, $287,000 and $172,000 of foreign currency translation
adjustments were recorded in accumulated other comprehensive income, respectively.
(7) RECENT
ACCOUNTING PRONOUNCEMENTS
Management
has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial
statements, and believes that these recent pronouncements will not have a material effect on the Company’s consolidated
financial statements.
(8) CONCENTRATIONS
OF RISK
Significant
Customer
For
the three months ended June 30, 2016 and 2015, the Company generated approximately $2,173,000 and $2,883,000, respectively, of
total revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 40% and
47% of total revenue for those periods, respectively. For the six months ended June 30, 2016 and 2015, the Company generated approximately
$4,465,000 and $5,300,000, respectively, of total revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees,
which represented approximately 41% and 44% of total revenue for those periods, respectively. As of June 30, 2016 and December
31, 2015, approximately $153,000 and $172,000, respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned
restaurants and its franchisees.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
report and the documents incorporated herein by reference, if any, contain “forward-looking statements” – that
is statements related to future events, results, performance, prospects and opportunities, including statements related to our
strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry
trends and our financial position. Forward-looking statements are based on information currently available to us, on our current
expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions
of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,”
“targets,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “may,” “will,” “would,” and similar expressions. In addition, any
statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and
other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their
nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ
materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or
contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games,
entertainment and marketing services industries, (2) the impact of new products and technological change, especially in the mobile
and wireless markets, on our operations and competitiveness, (3) our relationship with Buffalo Wild Wings, who together with its
franchisees accounted for a significant portion of our revenues, (4) our ability to maintain an adequate supply of the tablet
and related equipment used in our BEOND product line, (5) our ability to adequately protect our proprietary rights and intellectual
property, (6) our ability to raise additional funds in the future, if necessary, on favorable terms, (7) our ability to significantly
grow our subscription revenue and implement our other business strategies, (8) our ability to successfully and efficiently manage
the design, manufacturing and assembly process of our BEOND tablet platform and (9) the other risks and uncertainties described
in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and
described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including our Quarterly
Reports on Form 10-Q. Readers are urged not to place undue reliance on the forward-looking statements contained in this report
or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we do not undertake
any obligation to revise or update any such forward-looking statement to reflect future events or circumstances.
You
should read the following discussion of our financial condition and results of operations in conjunction with the consolidated
financial statements and the notes to those statements included elsewhere in this report.
INTRODUCTION
Management’s
discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying unaudited
condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report on Form 10-Q, to help provide
an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion
is organized as follows:
|
●
|
Overview
and Highlights
. This section provides a general description of our business and significant events and transactions that
we believe are important in understanding our financial condition and results of operations.
|
|
|
|
|
●
|
Critical
Accounting Policies
. This section provides a listing of our significant accounting policies, including any material changes
in our critical accounting policies, estimates and judgments during the three and six months ended June 30, 2016 from those
described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
section of our Annual Report on Form 10-K for the year ended December 31, 2015.
|
|
|
|
|
●
|
Results
of Operations
. This section provides an analysis of our results of operations presented in the accompanying unaudited
condensed consolidated statements of operations by comparing the results for the three and six months ended June 30, 2016
to the results for the three and six months ended June 30, 2015.
|
|
|
|
|
●
|
Liquidity
and Capital Resources
. This section provides an analysis of our historical cash flows, as well as our future capital requirements.
|
OVERVIEW
AND HIGHLIGHTS
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Our customers license
our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games,
nationwide competitions, and self-service dining features including dynamic menus, touchscreen ordering and secure payment. Our
platform can improve operating efficiencies, create connections among the players and venues and amplify guests’ positive
experiences. Built on an extended network platform, our interactive entertainment system has historically allowed multiple players
to interact at the venue, and now also enables competition between venues, referred to as massively multiplayer gaming. Our current
tablet platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program in December
2012, was expanded commercially during 2013, and the expansion was scaled during 2014. We continue to enhance our network architecture
and the BEOND tablet platform and player engagement paradigms. We also continue to support our legacy network product line, which
we refer to as Classic.
We
currently generate revenue by charging subscription fees for our service to our network subscribers, by leasing equipment (including
tablets used in our BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by
hosting live trivia events, and by selling advertising aired on in-venue screens and as part of customized games. In 2014, we
began offering pay-to-play premium content to certain customers, such as paid arcade. During the second quarter of 2015, we made
a strategic change in our premium content model by making arcade available on both a free-to-consumer (in exchange for an increased
subscription fee) and pay-to-play basis. This change required us to delay the general availability of pay-to-play arcade as we
retooled its content, workflow and positioning. As a result, during 2015, we generated additional subscription fee revenue from
those venues offering free-to-consumer arcade. We began rolling out the new pay-to-play arcade during the second quarter of 2016.
Over
115 million games were played on our network during 2015, and as of June 30, 2016, approximately 50% of our network subscriber
venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Old Chicago, Beef O’Brady’s,
Buffalo Wings & Rings, Native New Yorker, Houlihans, Boston Pizza, and Arooga’s.
We
own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, BEOND Powered by Buzztime and Play Along
trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document
are our property. Other trademarks are the property of their respective owners.
Unless
otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us”
and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers”
or “customers” refer to hospitality venues that subscribe to our network service; (c) to “consumers” or
“players” refer to the individuals that engage in our games, events, and entertainment experiences available at our
customers’ venues and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant)
of our customers at which our games, events, and entertainment experiences are available to consumers.
Recent
Developments
Reverse/forward
split of our common stock
At
our annual meeting of stockholders held on June 3, 2016, our stockholders approved an amendment to our restated certificate of
incorporation to give effect to, first, a reverse split of our outstanding common stock at an exchange ratio of 1-for-100 and,
then, immediately following such reverse split, a forward split of our outstanding common stock at a ratio that is not less than
2-for-1 nor greater than 4-for-1, with the final ratio to be selected by our board of directors in its sole discretion. Our board
of directors set the final ratio of the forward split at 2-for-1. We refer to the reverse split and to the forward split, together,
as the “reverse/forward split.”
On
June 16, 2016 (the “Effective Date”), we filed with the Secretary of State of Delaware the amendment to our restated
certificate of incorporation to effect the reverse/forward split. The 1-100 reverse split was effective at 6:00 p.m. Eastern Time
on the Effective Date and the 2-for-1 forward split was effective at 6:01 p.m. Eastern Time on the Effective Date. Any fractional
share of common stock resulting from the forward split was rounded up to the nearest whole share. Any stockholder who, as of immediately
prior to 6:00 p.m. Eastern Time on the Effective Date, held fewer than 100 shares of our common stock in one account and, subsequent
to the reverse split, would otherwise have been entitled to less than one full share of our common stock, received, instead of
the fractional share, $0.12 in cash for each such share held in that account, which was equal to the average of the closing price
per share of our common stock on the NYSE MKT over the five trading days immediately before and including the Effective Date.
As of immediately prior to the reverse split/forward split on the Effective Date, we had 92,439,174 of common stock outstanding,
and subsequent to the reverse/forward split, we had 1,848,597 shares of common stock outstanding. Approximately $3,000 was paid
to cashed-out stockholders who owned less than 100 shares immediately prior to the reverse split on the Effective Date.
Notice
of non-compliance with NYSE MKT continued listing standard
As
previously reported, in November 2015, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance
with Section 1003(a)(iii) of the NYSE MKT Company Guide because we reported stockholders’ equity of less than $6 million
as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014. In December 2015,
we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii)
by May 13, 2017. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that
extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).
In
April 2016, as previously reported, we received a letter from NYSE Regulation stating that we are not in compliance with Section
1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4 million as of December 31, 2015
and had net losses in three of our four most recent fiscal years ended December 31, 2015. As a result, we continue to be subject
to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is in addition
to our current noncompliance with Section 1003(a)(iii) of the Company Guide, we are not required to submit a new compliance plan.
The
listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation
staff reviews us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Sections
1003(a)(iii) and 1003(a)(ii) by May 13, 2017 or if we do not make progress consistent with our plan during the plan period, NYSE
Regulation staff will initiate delisting proceedings as appropriate. We have continued to make progress consistent with our plan
during the plan period.
Our
Strategy and Current Highlights
Below is a discussion
of our strategy and highlights of current accomplishments and milestones achieved during 2016:
Scale
digital menu and payment functionality.
We are heavily focused on delivering digital menu and payment functionality on the
tablet platform, which we believe will improve the operational and marketing value of our product offering. After ensuring our
tablet met the Payment Card Industry, or PCI, compliance standards applicable to our platform, we officially launched digital
menu and payment functionality in a pilot test at Buffalo Wild Wings and are currently live at 15 sites. A successful pilot will
help us deliver an enhanced guest experience and provide a national reference for other chain customers in our sales pipeline
that are also looking for this same functionality.
Also
during the second quarter, we launched Buffalo Wild Wing’s Fastbreak Lunch program in over 900 of its locations. The Fastbreak
Lunch program is a digital timer application on our tablet to visualize the speed of service, and since its launch, lunchtime
tablet usage has increased approximately 30%. This promotion not only improves the guest experience by providing quick turn-around
times on delivering select menu items in under 15 minutes, but it also provides for a free lunch if those items are not delivered
in the allotted time. In addition, Buffalo Wild Wings can leverage this promotion to gain important insight and data to make real-time
and longer-term improvements to service and the guest experience.
Improve
value and price for our “independent” customers.
We are focused on increasing the value of our offering by improving
game content and reducing the BEOND tablet platform cost to attract and retain quality independent customers. We have now entered
into Season 2 of a promotional partnership centered around our game content with the Washington Redskins, and our work with other
partnerships, such as FanDuel and Fandango, continue to evolve. Each of these partnerships are each tied to driving guest traffic
at our customer’s venues, increasing the guest community and improving loyalty.
With
respect to price, we continued to make progress on our hardware design and quality in order to reduce expense and to give us the
ability to offer flexibility in our pricing for quality independent customers.
Refine our commercial
execution.
We are focused on increasing our site count of both independent customers and chain customers. Receiving a reference
from a national chain account, such as Buffalo Wild Wings, is critical to our chain efforts, and our progress with Buffalo Wild
Wings is critical to receiving that reference. For our independent customers, we continue to model and test our go-to-market efforts
by improving our sales processes, technology and people. Additionally, we have begun working with a distribution partner, Digital
Dining. who sells primarily to hospitality venues through a dealer network. This is the first time we have embarked on an indirect
sales channel.
Monetize the network.
We intend to grow the consumer audience by engaging them more with improved entertainment experiences and providing premium
content that we can monetize through direct payment. In addition to the free-to-consumer arcade we provide to certain customers,
we launched a pay-to-play premium games lobby during the second quarter and are currently in 465 sites, and we expect to continue
rolling out the games lobby at additional sites throughout 2016, which we expect to result in accretive revenue from the consumers
who play on a pay-to-play basis. Additionally, we continued to leverage our network with on-tablet local and national advertising
campaigns.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to deferred costs and revenues, depreciation of fixed assets, the provision for income taxes including
the valuation allowance, stock-based compensation, bad debts, investments, impairment of software development costs, goodwill,
fixed assets, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates
are defined as those that are both most important to the portrayal of our financial condition and results and require management’s
most subjective judgments.
There
have been no material changes in our critical accounting policies, estimates and judgments during the three and six months ended
June 30, 2016 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2015.
RESULTS
OF OPERATIONS
Three
and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015
We
generated a net loss of $850,000 and $1,891,000 for the three and six months ended June 30, 2016, respectively, compared to a
net loss of $2,625,000 and $4,888,000 for the three and six months ended June 30, 2015, respectively.
Revenue
The
tables below summarize the type of revenue we generated for the three and six months ended June 30, 2016 and 2015:
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
Change
|
|
|
%
Change
|
|
Subscription revenue
|
|
|
4,355,000
|
|
|
|
80.5
|
%
|
|
|
4,202,000
|
|
|
|
67.9
|
%
|
|
|
153,000
|
|
|
|
3.6
|
%
|
Sales-type lease revenue
|
|
|
301,000
|
|
|
|
5.6
|
%
|
|
|
1,251,000
|
|
|
|
20.2
|
%
|
|
|
(950,000
|
)
|
|
|
-75.9
|
%
|
Other revenue
|
|
|
751,000
|
|
|
|
13.9
|
%
|
|
|
740,000
|
|
|
|
11.9
|
%
|
|
|
11,000
|
|
|
|
1.5
|
%
|
Total
|
|
|
5,407,000
|
|
|
|
100.0
|
%
|
|
|
6,193,000
|
|
|
|
100.0
|
%
|
|
|
(786,000
|
)
|
|
|
-12.7
|
%
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
Change
|
|
|
%
Change
|
|
Subscription revenue
|
|
|
8,729,000
|
|
|
|
80.2
|
%
|
|
|
8,402,000
|
|
|
|
70.5
|
%
|
|
|
327,000
|
|
|
|
3.9
|
%
|
Sales-type lease revenue
|
|
|
697,000
|
|
|
|
6.4
|
%
|
|
|
2,091,000
|
|
|
|
17.5
|
%
|
|
|
(1,394,000
|
)
|
|
|
-66.7
|
%
|
Other revenue
|
|
|
1,463,000
|
|
|
|
13.4
|
%
|
|
|
1,426,000
|
|
|
|
12.0
|
%
|
|
|
37,000
|
|
|
|
2.6
|
%
|
Total
|
|
|
10,889,000
|
|
|
|
100.0
|
%
|
|
|
11,919,000
|
|
|
|
100.0
|
%
|
|
|
(1,030,000
|
)
|
|
|
-8.6
|
%
|
Subscription
revenue increased for the three and six months ended June 30, 2016 primarily due to a higher average revenue per site (which we
refer to as ARPU), offset by lower average site count when compared to the same periods in 2015. During the three and six months
ended June 30, 2016, equipment lease revenue recognized under sales-type lease arrangements decreased due to fewer installations
of our BEOND platform for certain customers under sales-type lease arrangements when compared to the same periods in 2015. Equipment
lease revenue (which has lower margins due to the cost we incur to purchase the equipment that we lease) is recognized when we
lease BEOND equipment. The equipment lease revenue is a one-time payment that covers the lease of the equipment for three-years,
after which the lessee may purchase the equipment for a nominal fee or lease new equipment. We expect the amount of equipment
lease revenue to continue to decrease because the number of customers that have not converted from our legacy product line to
the BEOND tablet platform with which we enter into sales-type lease arrangements has decreased. Other revenue increased for the
three and six months ended June 30, 2016 due primarily to an increase in our live hosted trivia events and other miscellaneous
revenue, offset by a decrease in our revenue from pay-to-play arcade, which we began redeploying during the second quarter of
2016.
At June 30, 2016, we
had 2,859 network subscribers, compared to 2,942 at June 30, 2015 and 2,903 at March 31, 2016. The geographic breakdown of our
network subscribers is as follows:
|
|
Network Subscribers
as of June 30,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
|
2,697
|
|
|
|
2,766
|
|
Canada
|
|
|
162
|
|
|
|
176
|
|
Total
|
|
|
2,859
|
|
|
|
2,942
|
|
We continue to anticipate
site count to fluctuate quarter-to-quarter as there are many factors affecting overall growth, including attrition on the Classic
platform, shorter contract terms in the independent market and the negative impact of the hardware used in our second generation
tablet platform.
Direct
Costs and Gross Margin
A
comparison of direct costs and gross margin for the three and six months ended June 30, 2016 and 2015 is shown in the table below:
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
5,407,000
|
|
|
$
|
6,193,000
|
|
|
$
|
10,889,000
|
|
|
$
|
11,919,000
|
|
Direct Costs
|
|
|
1,840,000
|
|
|
|
3,379,000
|
|
|
|
3,876,000
|
|
|
|
6,028,000
|
|
Gross Margin
|
|
$
|
3,567,000
|
|
|
$
|
2,814,000
|
|
|
$
|
7,013,000
|
|
|
$
|
5,891,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percentage
|
|
|
66
|
%
|
|
|
45
|
%
|
|
|
64
|
%
|
|
|
49
|
%
|
Direct
costs decreased 46% and 36% for the three and six months ended June 30, 2016, respectively, primarily due to decreased equipment
expense of $1,418,000 and $2,116,000 for the three and six months ended June 30, 2016, respectively, as a result of fewer installations
of our BEOND platform for certain customers under sales-type lease arrangements as well as less scrap and repair expense related
to the BEOND platform when compared to the same periods in 2015.
During 2015, due to our
design and manufacturing process problems with the second generation tablet platform, we re-evaluated the strategy of managing
the manufacture, design and supply chain in-house. Also during 2015, and as part of our re-evaluation, we out-sourced the supply-chain
management and manufacturing of certain equipment related to our third generation BEOND tablet platform. The primary reasons for
doing so were to reduce cost and exposure to repair and maintenance expense related to, and to increase the long-term stability
of the quality of, such equipment. In the fourth quarter of 2015, we began deploying the third generation platform, and during
the three and six months ended June 30, 2016, we are recognizing a direct positive impact to our gross margins.
We
may continue to experience challenges with our tablet platform equipment, and as a result, we may be required to recognize additional
scrap and repair expense in the future.
Operating
Expenses
|
|
For the three months ended
June 30,
|
|
|
|
|
|
For the six months ended
June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Selling, general and administrative
|
|
$
|
4,153,000
|
|
|
$
|
4,868,000
|
|
|
$
|
(715,000
|
)
|
|
$
|
8,353,000
|
|
|
$
|
10,030,000
|
|
|
$
|
(1,677,000
|
)
|
Impairment of capitalized software
|
|
$
|
-
|
|
|
$
|
295,000
|
|
|
$
|
(295,000
|
)
|
|
$
|
-
|
|
|
$
|
295,000
|
|
|
$
|
(295,000
|
)
|
Depreciation and amortization (non-direct)
|
|
$
|
110,000
|
|
|
$
|
123,000
|
|
|
$
|
(13,000
|
)
|
|
$
|
224,000
|
|
|
$
|
244,000
|
|
|
$
|
(20,000
|
)
|
Selling,
General and Administrative Expenses
The
decrease in selling, general and administrative expenses for the three and six months ended June 30, 2016 was primarily due to
lower headcount when compared to the same periods in 2015, reflecting a reduction of approximately $785,000 and $1,390,000 in
payroll and related expenses, respectively. The decrease was also due to a reduction in marketing expenses of approximately $49,000
and $379,000 for the three and six months ended June 30, 2016, respectively, primarily related to market research activities that
occurred during the 2015 periods, which were not repeated during the 2016 periods. These decreases were offset by increased hardware
and software expenses of $102,000 and $120,000 for the three and six months ended June 30, 2016, respectively, when compared to
the same periods in 2015.
Impairment
of Capitalized software
Impairment
of capitalized software for the three and six months ended June 30, 2015 was the result of abandoning certain capitalized software
development projects that we concluded were no longer a current strategic fit or for which we determined that the marketability
of the content had decreased due to obtaining additional information regarding the specific purpose for which the content was
intended. There were no such impairment charges recognized for the three and six months ended June 30, 2016.
Depreciation
and Amortization Expense
The
decrease in depreciation and amortization expense for the three and six months ended June 30, 2016 compared to the same periods
in 2015 is primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.
Other
Expense, Net
|
|
For the three months ended
June 30,
|
|
|
|
|
|
For the six months ended
June 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase in
expense, net
|
|
|
2016
|
|
|
2015
|
|
|
Increase in
expense, net
|
|
Total other expense, net
|
|
$
|
(149,000
|
)
|
|
$
|
(139,000
|
)
|
|
$
|
(10,000
|
)
|
|
$
|
(303,000
|
)
|
|
$
|
(182,000
|
)
|
|
$
|
(121,000
|
)
|
The
increase in total other expense, net for the three and six months ended June 30, 2016 compared to the same period in 2015 is primarily
due to changes in foreign currency exchange gains and losses related to the operations of our Canadian subsidiary, as well as
reductions in miscellaneous other income when compared to the same periods in 2015.
Income
Taxes
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Provision for income taxes
|
|
$
|
(5,000
|
)
|
|
$
|
(14,000
|
)
|
|
$
|
(24,000
|
)
|
|
$
|
(28,000
|
)
|
We
expect to incur state income tax liability in 2016 related to our U.S. operations. We also expect to pay income taxes in Canada
due to profitability of our Canadian subsidiary. We have established a full valuation allowance for substantially all deferred
tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able
to generate future taxable income to realize these assets.
EBITDA—Consolidated
Operations
Earnings
before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance
with GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is
included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other
interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation
and amortization charges in comparison to their net income or loss calculation in accordance with GAAP.
The
reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the three and six months ended June
30, 2016 and 2015 is shown in the table below. EBITDA should not be considered as substitutes for, or superior to, net loss calculated
in accordance with GAAP.
|
|
For the three months ended
June 30,
|
|
|
For the Six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss per GAAP
|
|
$
|
(850,000
|
)
|
|
$
|
(2,625,000
|
)
|
|
$
|
(1,891,000
|
)
|
|
$
|
(4,888,000
|
)
|
Interest expense, net
|
|
|
153,000
|
|
|
|
182,000
|
|
|
|
280,000
|
|
|
|
284,000
|
|
Income tax provision
|
|
|
5,000
|
|
|
|
14,000
|
|
|
|
24,000
|
|
|
|
28,000
|
|
Depreciation and amortization
|
|
|
730,000
|
|
|
|
720,000
|
|
|
|
1,487,000
|
|
|
|
1,421,000
|
|
EBITDA
|
|
|
38,000
|
|
|
|
(1,709,000
|
)
|
|
|
(100,000
|
)
|
|
|
(3,155,000
|
)
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of June 30, 2016, we had cash and cash equivalents of $3,571,000 compared to cash and cash equivalents of $3,223,000 as of December
31, 2015.
We
believe our existing cash and cash equivalents and the availability on our credit facilities will be sufficient to meet our operating
cash requirements and to fulfill our debt obligations for at least the next twelve months. In order to increase the likelihood
that we will be able to successfully execute our operating and strategic plan and to position the company to better take advantage
of market opportunities for growth, we are evaluating additional financing alternatives. If our cash and cash equivalents are
not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash
uses or seek financing. Any actions we may undertake to reduce planned capital purchases or reduce expenses may be insufficient
to cover shortfalls in available funds. If we require additional capital, we may be unable to secure additional financing on terms
that are acceptable to us, or at all.
Working
Capital
As
of June 30, 2016, we had working capital (current assets in excess of current liabilities) of $1,642,000 compared to working capital
of $3,988,000 as of December 31, 2015. The following table shows the change in our working capital from December 31, 2015 to June
30, 2016.
|
|
Increase
(Decrease)
|
|
Working capital as of December 31, 2015
|
|
$
|
3,988,000
|
|
Changes in current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
|
348,000
|
|
Accounts receivable, net of allowance
|
|
|
(278,000
|
)
|
Site equipment to be installed
|
|
|
(1,005,000
|
)
|
Prepaid expenses and other current assets
|
|
|
49,000
|
|
Change in total current assets
|
|
|
(886,000
|
)
|
Changes in current liabilities:
|
|
|
|
|
Accounts payable
|
|
|
168,000
|
|
Accrued compensation
|
|
|
(203,000
|
)
|
Accrued expenses
|
|
|
(141,000
|
)
|
Sales taxes payable
|
|
|
(78,000
|
)
|
Income taxes payable
|
|
|
(9,000
|
)
|
Current portion of long-term debt
|
|
|
1,942,000
|
|
Current portion of obligations under capital leases
|
|
|
(3,000
|
)
|
Deferred revenue
|
|
|
139,000
|
|
Other current liabilities
|
|
|
(355,000
|
)
|
Change in total current liabilities
|
|
|
1,460,000
|
|
Net change in working capital
|
|
|
(2,346,000
|
)
|
Working capital as of June 30, 2016
|
|
$
|
1,642,000
|
|
Cash
Flows
Cash
flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows,
are summarized as follows:
|
|
For the six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
13,000
|
|
|
$
|
(1,135,000
|
)
|
Investing activities
|
|
|
(466,000
|
)
|
|
|
(815,000
|
)
|
Financing activities
|
|
|
748,000
|
|
|
|
204,000
|
|
Effect of exchange rates
|
|
|
53,000
|
|
|
|
(48,000
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
348,000
|
|
|
$
|
(1,794,000
|
)
|
Net
cash provided by (used in) operating activities.
The $1,148,000 change in cash provided by operating activities was due to
a decrease in net loss of $2,219,000, after giving effect to adjustments made for non-cash transactions, offset by a decrease
in cash provided by operating assets and liabilities of $1,071,000 during the six months ended June, 2016 compared to the same
period in 2015, primarily related to a large past-due receivable payment being received in the first quarter of 2015.
Our
inventory levels of site equipment to be installed decreased to $2,985,000 as of June 30, 2016, from $3,990,000 as of December
31, 2015, reflecting released product as part of our conversion of existing sites to the BEOND platform. Since we are supporting
multiple generations of the BEOND tablet platforms, we have seen an increase in the complexity of our supply chain. We anticipate
this complexity will remain with us for the 2016 fiscal year and thus will affect retaining a higher level of inventory for site
equipment to be installed.
Our
largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $827,000 to $5,376,000 for
the three months ended June 30, 2016 from $6,203,000 during the same period in 2015 due to lower headcount.
Our
primary source of cash is cash we generate from customers. Cash received from customers decreased $2,037,000 to $11,831,000 for
the six months ended June 30, 2016 from $13,868,000 during the same period in 2015. This decrease was primarily a result of receiving
a large past-due receivable during the six months ended June 30, 2015, and to a lesser extent, decreased revenue during the six
months ended June 30, 2016 when compared to the same period in 2015.
Net
cash used in investing activities.
The $349,000 decrease in cash used in investing activities was primarily due to a decrease
in capital expenditures and software development expenditures.
Net cash provided
by financing activities.
Cash provided by financing
activities increased by approximately $544,000. During 2016, we made fewer payments on our long-term debt, but also received fewer
proceeds from long-term debt when compared to the same period in the prior yea
r.
RECENT
ACCOUNTING PRONOUNCEMENTS
Refer
to Note 7 of the condensed consolidated financial statements, “Recent Accounting Pronouncements.”
OFF-BALANCE
SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial
condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.